The Deficit-Growth Dilemma

 

Budget 2022-23 comes at a crucial time when the economy is on the brink of recovery. The revised estimate of GDP growth is 9.2% which takes the economy at a pre-pandemic level. The negative side is that this is a setback of two years. To pull up the economy and set a strong growth momentum the government adopted various free-market reforms. It has also stepped up spending in the current and previous fiscal with a special boost to capital expenditure. Understandably, the government has also breached the Fiscal Responsibility and Budget Management Act (FRBM) limit of 3% of the GDP and will continue to do so for the next fiscals. There are a few downsides to this. The Budget estimate for capital expenditure for 2022-23 is INR 7.5 lakh crores, a 35% increase over the current year. Even the revised estimate for the current year is over INR 6 lakh crores which is higher than budget estimates. This is impressive and is intended to crowd in private investment which will create jobs, which in turn will create demand, thus creating a virtuous cycle of investment and growth. The concern here is a higher fiscal deficit. Although the budget estimate of fiscal deficit is 6.4% of GDP down from 6.9% of the current year, it is still higher than general expectations. 6.4% of fiscal deficit translates to government borrowing of INR 16 lakh crores. Higher government borrowing leaves less money for the private sector to borrow and invest. So, the intention of crowding in the private investments through capital expenditure may be defeated due to this. What makes matters worse is tightening monetary conditions.  

Consumer price index (CPI) inflation increased to 5.56% in December 2021 while wholesale price index (WPI) inflation is in double digits for a couple of months. It is a concern in other countries too. Central banks around the world have already indicated that a rate hike might not be far away. This will make it even more difficult for the private sector to borrow and invest. Spike in bond yield just after the budget announcement was a glimpse of this.  On one hand, the government is increasing capital expenditure to crowd in private investments, on the other, higher deficit and resultant borrowing may set off the effect of capital expenditure. The capital expenditure should be effective enough to incentivize the private sector to invest even in case of a higher interest rate.


The government may consider stepping up disinvestment and generating resources to fund spending. This will have a dual benefit. The government will mobilise resources as well as the PSUs will start functioning more efficiently. It should also work towards facilitating India’s entry into a global bond index to deepen the bond market and make borrowing easier and cheaper.  In the current environment, it is important that government supports the economy by spending money but it needs to keep in mind the possible negative long-term effects of expenditure too.

 

Author

Mr. Sarang Joglekar (1152190171)

Research Scholar, 

B.Sc. Economics

Dr. Vishwanath Karad MIT-WPU

 

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